BENGALURU (Reuters) – Activity in India’s dominant services sector grew at its slowest pace in a year in May, hurt by weak domestic demand, a private survey showed on Wednesday, while a sharp easing in price pressures virtually cemented the case for another rate cut this week.

The Nikkei/IHS Markit Services Purchasing Managers’ Index fell to 50.2 in May, its lowest since May 2018 and only a touch above the 50-mark that separates contraction from growth.

That will make disappointing reading for policymakers, after data last week showed India’s economic growth slipping to its weakest in more than four years in January-March.

“India’s dominant service economy again suffered the impacts of election disruptions, with growth of both new work and business activity softening for the third straight month,” said Pollyanna De Lima, principal economist at IHS Markit, said in a press release.

Indian Prime Minister Narendra Modi and his Bharatiya Janata Party scored a landslide election victory last month on a mandate of business-friendly policies and a tough stand on national security.

The survey showed that while foreign demand expanded at its quickest pace in nearly a year, a new business orders sub-index – which tracks overall demand – touched its lowest level in eight months despite a decrease in price pressures.

Inflation also seemed contained with input prices rising at their slowest rate in nearly 2-1/2-years and a sub-index measuring prices charged touched a three-month low.

With overall inflation expected to remain below the Reserve Bank of India’s medium term target of 4%, and economic growth sluggish, the central bank is predicted to cut interest rates for the third successive meeting on Thursday, according to a Reuters poll.

But some forward looking indicators in the downbeat survey showed an improvement and suggested there may be a turnaround soon.

Optimism about the next 12-months improved slightly and firms increased the pace of hiring to the fastest in three months.

“Some ground was lost so far in the first quarter of fiscal year 2019/2020 but, with a government formed and a resumed policy agenda, a recovery is expected as we head towards the second half of 2019,” added De Lima.

A composite index, which measures both services and factory activity, remained unchanged at 51.7 in May, cushioned by a better manufacturing performance.

Reporting by Indradip Ghosh

Editing by Shri Navaratnam;

indradip.ghosh@thomsonreuters.com; +91 80 6749 9724; Reuters Messaging: indradip.ghosh.thomsonreuters.com@reuters.net